Ninth Circuit Overturns Sternberg

The Ninth Circuit Court of Appeals issued an en banc decision “that 11 U.S.C. § 362(k) authorizes an award of attorney’s fees reasonably incurred in a debtor’s prosecution of a suit for damages to provide redress for a violation of the automatic bankruptcy stay.” America’s Servicing Co. v. Schwartz-Tallard (In re Schwartz-Tallard), ___ F.3d. ___, No. 12-60052 (Oct. 14, 2015). In so holding, the court overruled Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010), which held that section 362(k) “allowed a debtor to recover only those fees incurred to end the stay violation itself, not the fees incurred to prosecute a damages action.”

The stay violation occurred when, during her chapter 13 bankruptcy, ASC wrongfully foreclosed on Ms. Schwartz-Tallard’s home. She moved for relief under section 362(k) seeking damages and an order requiring ASC to reconvey the home to her. The court granted the motion and ordered ASC to pay economic and emotional distress damages, punitive damages, and attorney’s fees. ASC conceded the violation but appealed the damage award to the district court which upheld it. Ms. Schwartz-Tallard then sought approximately $10,000 in attorneys’ fees representing the amount incurred in the defense of the damage award. The bankruptcy court found that under Sternberg, it could not grant the fee award. The Bankruptcy Appellate Panel, giving Sternberg a narrow interpretation, reversed. In re Schwartz-Tallard, 473 B.R. 340, 350 (B.A.P. 9th Cir. 2012). On appeal, the ninth circuit agreed. It reconciled Sternberg by finding that when ASC appealed the damage award it also challenged the underlying finding of stay violation thereby continuing the violation. In re Schwartz-Tallard, 765 F.3d 1096 (9th Cir. 2014). The court granted ASC’s motion for rehearing en banc.

The en banc court abandoned all efforts to reconcile the award of attorney’s fees with the holding in Sternberg, opting instead to “jettison” the Sternberg decision altogether where it was in conflict.

The court began with discussion of the wording of section 362(k) to determine whether Congress authorized recovery of attorney’s fees only for fees incurred in ending the stay violation and not those incurred in recovering damages for that violation. The Sternberg decision was premised on the finding that the language of section 362(k)(1), where Congress included attorney’s fees in “actual damages” rather than as a typical fee-shifting provision, was ambiguous.

The en banc court disagreed that the statute was ambiguous. It concluded that there was “nothing in the statute that suggests Congress intended to cleave litigation-related fees into two categories, one recoverable by the debtor, the other not. The statute says ‘including costs and attorneys’ fees,’ with no limitation on the remedy for which the fees were incurred.” The court found that the language of the statute expressed congressional intent to include fees for defending a damage award. It further found that the historical context in which section 362(k) was enacted further supported this finding. Prior to that section being added to the Code, courts treated stay violations as contempt proceedings and routinely awarded attorney’s fees in situations similar to Schwartz-Tallard. The court concluded that Congress intended to codify that practice in section 362(k) and that the language of the statute in that regard was unambiguous.

The court added that the clear purpose of section 362(k) was to pave the way for debtors to vindicate their right to the breathing room provided by the automatic stay. Specifically citing NACBA’s amicus brief, the court noted that the goal of preventing violations of the automatic stay would be defeated if debtors could not afford to pursue their right to recovery.

As further support for overruling Sternberg, the court pointed to the difficulty courts have had implementing it due to the necessity of case-specific findings to allocate attorney’s hours between that which is recoverable and that which is not, and to determine exactly when the automatic stay violation ended.

On these bases the court affirmed the award of attorney’s fees and overruled that portion of Sternberg in conflict with its reasoning.

Judges Bea and O’Scannlain concurred in a separate opinion. They agreed that the majority decision was properly based on unambiguous language of section 362(k) and, therefore, opined that the court’s further discussion of congressional intent was unnecessary. “Engaging in gratuitous speculation of what ‘Congress’ plan’ must have been when it enacted § 362(k) ignores years of Supreme Court and Ninth Circuit precedent requiring judicial inquiry to cease when a court finds a statute unambiguous.”

Judge Ikuta dissented, arguing that the Sternberg court correctly found the language ambiguous and interpreted it correctly when it held that “actual damages” including attorney’s fees related to correcting the stay violation rather than in litigating it.

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